Otis Casey of Markit wrote this CDS report
Equity markets started a bit lower today and the US Dollar strengthened based on the Fed’s surprise move to raise the discount rate by a quarter of a percentage point to 0.75%. Considering the broad rally across asset classes last year was attributed in large part to loose monetary policy, one would think that such a surprise would be a significant setback for the markets. That did not happen.
For one the Fed was quick to indicate that the rate change was not a signficant shift in policy but rather a technical move. What market participants perhaps found even more comforting was a bit of reverse psychology: if the Fed was comfortable in raising the discount rate in a surprise move, it must mean that the governors feel increasingly confident that the an economic recovery is not only underway but sustainable. Fed regional reports this week did provide some ammunition for that point of view.
One would think that bank stocks would suffer a bit on the news and they did start off the day a bit lower. After all, the increased discount rate does raise their cost of business. However the lower opens do not seem to be holding. At the time of this report, Bank of America was at 16.00, up 12 cents per share. Citigroup was up a penny at 3.44. Though, JPMorgan Chase was down 0.8% at 40.08. CDS for all three were tighter throughout the day thus far. Bank of America and JPMorgan were 7 bps tighter at 129 and 67, respectively. Citigroup was 9 bps tighter at 195. CDS activity was quiet at mid-day.
Markit chart of Citi, BAC and JP Morgan 5-yr CDS
The broad corporate credit picture was unchanged overall. The Markit CDX Investment Grade Index was 2 bps tighter for the five year tenor. The High Yield was unchanged.
Activity in sovereigns was interesting today despite any major news. The PIGS all ended up tighter on the day, particularly Portugal which was 14 bps tighter at 161 bps. Greece was 7 bps tighter. Trading was active ahead of the weekend in two-sided trade: profit taking balancing those adding to shorts.